[HONG KONG] The Hong Kong dollar weakened to a near one-year low against the US dollar on Monday (May 19), reversing the strength seen two weeks ago, as falling borrowing costs in the financial hub on the back of flush cash conditions led to a return of carry trades.
The loose liquidity conditions come after the city’s de-facto central bank forcefully stepped up intervention at the start of this month to defend the currency’s peg to move within 7.75 and 7.85 per dollar by purchasing greenbacks while injecting local currency.
Such an operation effectively swelled the aggregate balance, a gauge of cash at banks, to a near three-year high of HK$173.64 billion (S$28.8 billion) on Friday, compared with HK$45.1 billion at end-April.
The Hong Kong dollar fell to a low of 7.8220 per dollar, the weakest level since May 2024. It last traded at 7.8206 per dollar as of 0603 GMT.
“It is driven by carry,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
A carry trade is a popular strategy of borrowing a low-yielding currency to fund a higher-yielding currency for profit, and the short-end rate differential between Hong Kong dollar and US dollar has widened to yield a near 4 per cent profit from long USD/HKD spot, Wang said.
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The rapid dial back of the Hong Kong dollar reflects “the positive carry of USD/HKD due to the collapse of Hong Kong Interbank Offered Rate (hibor), not the loss in confidence in the HKD peg,” Raymond Yeung, chief economist for Greater China at ANZ, said in a note.
The overnight hibor, a key barometer of liquidity conditions, has been hovering at three-year lows since the Hong Kong Monetary Authority (HKMA) action. It was fixed at 0.03577 per cent on Monday.
“HKD liquidity situation stays very flush … as the liquidity injected earlier will stay within the system in the absence of weak-side Convertibility Undertaking triggering,” said Tommy Xie, head of Greater China research at OCBC Bank.
Xie also said that a string of recent initial public offerings (IPOs) in the Hong Kong market were smaller than initially expected and left the Hong Kong dollar liquidity on the loose side.
However, analysts widely expect the loosening cash conditions in Hong Kong to be temporary.
“The sharp fall in hibor is favourable for Hong Kong’s economy, where the property market has been lacklustre. The authorities would withdraw liquidity only if the extreme market positioning threatens financial stability,” ANZ’s Yeung said. REUTERS
